SEAF’s India Agribusiness Fund Managing Director Hemendra Mathur outlines the case and process for investing in ‘cattle’ as an asset class.
This article originally appeared on VCCircle.com, August 18, 2015
Investing in ‘cattle’ as an asset class
BY Hemendra Mathur
VC/PE players have an opportunity to make attractive returns by investing in cattle aggregation models.
1960s and 70s saw the dawn of Green and White revolution in India. Though timings were similar, there was a big contrast between the Green and the White revolution. The Green revolution started from the production end (by improving the productivity of crops) while the White revolution started from the processing end (processing the milk collected from millions of farmers through cooperative structure).
The same contrast applies to the Green and the White revolution version #2 which we are witnessing now. In agriculture, the focus is moving from production to higher processing levels where as in dairy, we are moving from the processing to “higher and quality milk production”.
In order to achieve higher quantity and better quality of milk, unprecedented investment is happening in rural and semi-urban India in the dairy supply chain. For the first time in Indian dairy history, there is emergence of thousands of “cattle aggregation” models which is very distinct from “farmer aggregation” model, which was the fulcrum of milk collection in the first phase of White revolution in 1960s and 70s.
While cooperatives and private dairy will continue to play an important role in the dairy industry, the cattle aggregation model is surely going to change the way milk is going to be produced, collected, processed, transported and marketed. We are seeing emergence of thousands of cattle farms across the country with herd size typically varying from as low as 20 to as many as 10,000 cattles per farm with median hovering around 100 cattles per farm.
It is co-incidental that cattle aggregation model in rural India is developing at the same time when we are seeing successes of many aggregation models in urban India in many categories like taxis (Uber, Ola); grocery (BigBasket, LocalBanya, PepperTap), restaurants/food delivery (Zomato, Foodpanda, Tinyowl), etc. The common theme across all aggregation models, whether urban or rural, is to make supply chain more efficient and improve quality standards of product and services.
Factors driving cattle aggregation
What are the factors which are driving this change?
– The demand for dairy products has seen an inflection point in last five to seven years. Amul took about 35 years to achieve $1 billion turnover and took just another seven years to go from $1 billion to $3 billion and now targeting to go from $3 billion to $6 billion in next five years. Other dairies have also demonstrated similar growth trajectories over last five-seven years. This surge in milk demand is driven by an increase in consumer base as well as increase in per capita consumption. The total milk consumption in India stands at $45- 50 billion per annum growing at CAGR of 8-10 per cent.
– It is not just the absolute demand for milk and milk products which is increasing but also the nature of demand is changing. There are two components to it.
- One, the dairies are selling more dairy products compared with liquid milk now than ever before. Products include packed curd, paneer, flavoured milk, cheese, butter, flavoured milk, ghee, yogurt, etc. The share of liquid milk: milk products in sales of a typical dairy company which was stagnant at 90:10 for a long time, is now changing to 70:30. The increase in the share of milk products in sales is improving margins of dairy companies thus helping them to invest in quality milk.
- Secondly, demand for good quality milk is going up by many notches. Consumers are willing to pay premium for good quality milk. The high quality milk marketed as fresh, organic, pure, unadulterated milk is fetching price as much as Rs 80 to 100 per litre, almost double the price of milk at which cooperatives and private dairies are selling.
– Traditionally, neighbourhood gaushalas used to be the source of such milk which has become unviable because they became part of city limits pushing the real estate cost higher.
– Last, but not the least, there are several instances of milk adulterations and malpractices in milk supply chain. According to a study published in 2012 based on survey by FSSAI, as much as 70 per cent samples of milk were found adulterated. The common adulterants are urea, detergents, edible oil, formalin and liquid hydrogen. All the adulterants are toxic in nature and have severe impact on health. Like for instance, there is a belief that early onset of puberty among Indian kids is attributed to excessive hormones given to cattle during lactation.
Increased consumer awareness about milk quality is opening up a huge market for pure and unadulterated milk. This is precisely the reason behind mushrooming of thousands of cattle farms in the last few years. Interestingly, the target consumer for high quality milk (which is usually sold at significant premium) is not just the affluent class but also many middle class families who are more concerned about their kids’ health.
Components of investing in cattle farming
Given the significant demand potential for high-quality milk, many entrepreneurs have started cattle farming. For the last several weeks, I have been receiving at least one proposal per week for investing in cattle farm.
The interesting point to note is that there are many professionals who are quitting their corporate jobs to start cattle farming. However, professional entrepreneurs must realise that more than the capital, the expertise to manage cattle farm is key for any sustainable and scalable model. Listed below are various components which an entrepreneur (particularly professional turned entrepreneurs) must look for while investing into cattle farming:
- Cattle: This is the core of cattle farming. The ability to choose right breeds and ability to manage their health and hygiene decides the success of a cattle farm. This also requires technical veterinarian expertise such as artificial insemination, management of lactation cycles, vaccination to prevent diseases, etc. The advice here is to involve veterinary experts as well as local people engaged in cattle farming. Also many entrepreneurs make the mistake of starting with big herd size (100 and above). The advice is to start with smaller heard size (20-50), learn from it and then scale. There are many instances of investments gone wrong, where entire herd got wiped out due to diseases and poor hygiene management.
As a thumb rule, the investment required in buying cattles and putting plant and machinery is Rs 2-3 crore (excluding cost of land) to start a cattle farm with herd size of 20-50.
- Cattle feed: This is another important part of cattle farming. The right nutrition including protein, fat, carbohydrates, minerals and vitamins is key to increase milk yield. There are many animal feed companies like Godrej and Abhay Cotex, who are working on improving the feed quality.
Cattle feed is another big investment opportunity in India and with emerging cattle aggregation models; it is easier to market, test and monitor the results on milk productivity. Many cattle farm owners are also doubling up as distributors for the feed companies.
- Dairy machinery: This is relatively easier part. The typical components are milking machines, pasteuriser, homogeniser, packing machines, bulk coolers and feed mills.
Many Indian and international vendors are available for dairy and feed machinery including IDMC, De Laval, Dairymaster and Keenan Systems. Next generation technology is making inroads in cattle farming. Many cattle farmers are now using RFID tags and GPS based devices for cattle tracking and monitoring coupled with cloud based systems for cattle farm management.
- Distribution channels: The return on investment in cattle farms is above 20-25 per cent only when the entrepreneurs have the ability to market to the end consumer, thus commanding sales price anywhere between Rs 60-100 per litre. Hence it is important to have cold chain right from the production to consumer to market this premium milk. Value addition to make high quality milk products, utilisation of by-products (such as cow dung for biogas), and integration of feed mills can further improve ROI.
Case for VC/PE investment in cattle farming
Most cattle farms today are at angel/VC stage requiring less than Rs 5 crore of investment. Integrated cattle farms from feed to production to logistics to marketing require investments upto Rs 15-25 crore.
The models can be scaled on two dimensions.
- The horizontal scalability is in setting up more farms or increasing the herd size in the same farm.
- The vertical scalability is in backward integrating into feed and forward integrating into marketing to become a regional brand of milk and milk products.
In both cases, exits are possible given the continued interest of PE funds in investing in dairy supply chain as well as imminent entry of international dairies who want to buy controlled milk production systems as provided by cattle farms. Even many Indian dairy firms such as Chitale and Parag have demonstrated successful integration of cattle farms in their businesses and it is very likely that other Indian dairies also want to develop in-house milk production capabilities through cattle farms. Many corporates like Sahara group and DS group are also working on building large-scale cattle farms.
It is estimated that there are about 10,000 cattle farms in India at various stages of construction. With a conservative investment figure of Rs 3 crore per farm, about Rs 30,000 crore is being invested or getting invested, mostly funded through equity because debt is scarce for start-up dairy farms.
Investors have to evaluate the huge market demand for quality milk in context of execution and management risk. I will conclude by saying that VC/PEs have a unique opportunity available now to make attractive returns in the White revolution version #2 by investing in emerging cattle aggregation models across India.
(Hemendra Mathur is Managing Director at SEAF India Investment Advisors.)
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